The next-generation of outsourcers could soon be relocating to a place most of us only hear about after the news of some high-profile tax scandal hits the morning papers. With only 55,000 inhabitants, it doesn’t take long to realize that the Cayman Islands will never be Latin America’s BPO workhorse. Yet, this has not stopped real estate group Cayman City Enterprise from working with the local authority to build out a 50-acre business park catering to, among other niche industries, outsourced services firms.

Where the Islands lose out on human capital, they certainly win on a favorable enabling environment. The question is whether 100 percent tax exemptions will be enough to transform these British territorial isles into the new nerve center of Latin American outsourcing. Furthermore, we wonder what kind of signals the industry would be sending if tax avoidance – instead of tax relief – were to become standard practice.

Tax Havens Diversify Into New Sectors

Exotic offshore locales in the Swiss Alps and the Caribbean doubling as tax havens have historically been finance and legal services territory. But the Cayman Islands were hit hard after the 2008 financial meltdown when the local hedge funds dissolved and law firms went belly up. So in an effort to revitalize the Cayman Islands’ tax haven economy, the local authority has granted permission for a new Special Economic Zone (SEZ) that will cater to smarter and tech-savvy industries.

Once completed, Cayman Enterprise City will be a shiny fifty-acre business park with all of the amenities favorable to IT, Media, Biotech, and outsourcing firms looking to complement their global growth strategy. The 100 percent exemption from income, corporate, and capital gains tax is only the beginning to the overall value proposition that the new park will offer. Under the SEZ, the cumbersome chore of filing work permit applications will be eliminated, as well the hefty import duty which companies must pay on things like office furniture, computers, and IT infrastructure.

Data Farms Possible, Contact Centers Not

Duty-free servers and networking cables are another piece to the tax haven puzzle, particularly for internet companies and eCommerce firms that have done their accounting homework. The simplistic version of the formula is this: In order to qualify for tax exempt status, companies seeking shelter in places like the Cayman Islands must have their core IT infrastructure physically located there. Therefore, it stands to reason that even large outsourcing firms would be tempted to establish regional hubs in places like the Cayman Islands.

The question here is whether having offices in the Cayman Islands immediately raises red flags to clients and regulatory bodies, not to mention the public at large

So, are these tax friendly tech parks in direct competition with the free trade zones popping up in places like Costa Rica and Colombia? The answer is a definite no for high-volume BPO operations. About half of the people residing on the Cayman Islands are foreign nationals, meaning that they are either retired or had moved there for work. And while there are direct flights to most major cities, the Caymans are not a cheap place to live. According to the CIA Factbook, GDP per capita is 14th highest in the world. That makes for nice golf courses, but expensive employee housing.

Modeled After Dubai’s Successes

Cayman Enterprise City is not the first of its kind. It was modeled after Dubai Media City which has been in operation since 2001 and hosts a range of media giants including CNN, the BBC, McGraw Hill, Sony, and the BBC. Given enough momentum, one could envision a scenario where big and small technology firms establish retreat-style centers of innovation and R&D facilities, and even potentially executive-level offices.

The Islands are officially a British overseas territory and abide by English common law, which, according to Hilary Cahill from CEC, reduces the market’s overall political risk profile that has all too often stigmatized – rightly or wrongly – other markets across the Americas. One huge risk factor is the weather as hurricanes tend to strike about once every two years. Bad weather has not stopped financial and legal services firms from locating there, but technology sensitive firms might want to do their due diligence before jumping in.

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Tax Avoidance Could Raise Red Flags

There’s also a certain perception hurtle that the Islands must overcome. The question here is whether having offices in the Cayman Islands immediately raises red flags to clients and regulatory bodies, not to mention the public at large. While some of the world’s biggest banks including HSBC, Deutsche Bank, UBS, and Goldman and Sachs have operations on the Cayman Islands, being in the business of finance almost legitimizes their presence there.

The concern is whether it would be smart for vendors to start getting in the habit of tax avoidance. The industry already has its own public image issues to deal with. Even though free trade zones are, according to Dwayne Prosko of Deloitte “like water to the industry,” the economic impacts rendered when 3,000 jobs are created justify the incentives. Moving house for tax benefits alone could be a bit more difficult to justify.

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